A 529 plan is a state-sponsored education savings program that allows an individual to save in a tax-deferred account to pay for a beneficiary's post-secondary education at any accredited school in the United States. Unlike Coverdell Education Savings Accounts, which excludes joint filers with adjusted gross incomes (AGIs) above $220,000 and single filers with AGIs above $110,000, there are no income restrictions on those contributing to the plan.
529 plans come in two categories: Prepaid Tuition Plans and College Savings Plans. Listed below are some of the features of a College Savings Plan.
Taxation of Withdrawals
529 plan withdrawals are federal income tax-free as long as the money is spent on tuition, room, board, books, or other qualified expenses. Non-qualified withdrawals will require a 10% penalty on investment gains and will be taxed as ordinary income at the owner's rate.
Contributions
Unlike Coverdell Education Savings Accounts where annual contributions are limited to $2,000 annually, contributions to 529 College Savings Plans are essentially unlimited. Many states, however, do tend to limit contributions once plan assets have reached a defined maximum, typically $200,000 - $250,000. Furthermore, individuals can give up to $13,000 annually per beneficiary without incurring the federal gift tax.
Flexibility and Control
Plan assets can be used to pay for qualified higher education expenses at accredited colleges and universities nationwide that are eligible to participate in certain federal student aid programs. These include public and private colleges and universities, graduate schools, two-year community colleges, and vocational-technical schools.
The donor retains control over the account. Unlike custodial accounts, under the Uniform Gifts to Minors Act, the money in a Section 529 College Savings Plan does not automatically become property of the child at age 18. The donor also may change beneficiary as long as it is within the same family.
Minimum Investment
Many plans have low initial minimums of $500 or $1,000 and can usually be arranged for automatic investments of as little as $50 a month.
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* An investor's home state may only offer favorable state income tax treatment for investments made in a plan offered by such state. Selecting a state plan where you are not a resident may limit your ability to take advantage of any available state income tax exemptions or state tax deductions for contributions that your resident state offers. Certain state plans may impose a penalty for "non-qualifying" withdrawals and if you were able to deduct the original contributions on your state income tax return, there may be a state "recapture" of income tax due.
* This requires that no further gifts are made over the five-year period and that the gift is treated as a series of five equal annual gifts on the next federal gift tax return after the gift is made. Failure to survive the five-year period may result in a portion of the gift being included in the donor's estate for estate tax purposes.
Participation in a 529 College Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend an institution of higher education. Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals. Depending upon the laws of the customer’s home state, favorable state tax treatment for investing in a 529 Plan may be limited to investments made in a 529 Plan offered by the customer’s home state. Assets in a 529 Plan can potentially reduce the beneficiary’s ability to qualify for some forms of college financial aid. Customers should consult their tax advisor about any state tax consequences of the investment.
Depending upon the laws of the home state of the customer or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if the customer invests in the home state’s 529 college savings plan; any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision; and the customer should consult with his or her financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to the customer’s specific circumstances and also may wish to contact his or her home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan.
Consider the place of various education planning vehicles in the context of the overall financial plan with the appropriate professional(s). For more complete information, including a description of fees, expenses and risks, see the offering statement or program description.
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College Savings Plans (529)